27 Feb 2014
Are rent caps the answer?
Renters are understandably angry about the unaffordable cost of renting. In the capital, average rent for a two bedroom flat is now a whopping £1,495 a month. Other parts of the country are also experiencing record highs.
Shelter is deeply concerned by how unstable and unaffordable private renting has become. The record high costs of private renting have led to renewed calls for some form of rent control. But we’re not convinced that comprehensive rent caps are the best answer.
Is rent capping the answer?
There are two different ways of using the law to control private rent levels:
1) The old-style rent cap involved setting overall maximum rent levels, giving tenants indefinite contracts, and limiting the rent increases that could be charged to tenants once they were in a contract. It was originally introduced in the UK in 1915 as an emergency wartime measure to deal with housing shortages caused by the absence of any building workforce. However, few comparable countries have such an intensive set of controls today.
2) Germany, France and Spain use what is sometimes called second generation rent control to calm rents without directly setting prices: rents are determined by the market at the outset; renters have longer term contracts and, as long as renters are in these contracts, their rent can only be increased by an inflationary index, such as RPI or CPI.
We think that the second option would dramatically improve private renting in England- and we’ll explain why later on. Although we wouldn’t call it rent control as this often adds to the confusion.
Whether the first option, old-style rent caps, work depends on how landlords respond. Historic and international evidence suggests that the side-effects can be pretty undesirable:
- In markets where demand outstrips supply, landlords may discriminate on a tenant’s characteristics rather than price.
- This could see people with lower incomes pushed even further to the bottom of the market (or into a black market with fewer protections) as prospective tenants with higher incomes are viewed as more reliable.
- Landlords may attempt to maintain their margins by cutting down on repairs.
- Or they may try to game the system. In New Jersey, where rent caps exist, landlords have been subdividing their apartments. These landlords end up benefitting while ordinary renters are forced into even more cramped living conditions.
- Equally, if capped rents do not cover mortgage payments, landlords with large mortgages may be forced to end the tenancy and sell the property. This could leave those families who have no choice but to rent privately with even fewer options.
So, how can we bring down the cost of renting?
Rent levels are high because there are too many people who have to rent, and not enough homes available. Rents can only be reduced sustainably by increasing the overall supply of all types of homes, so that more people can get a social home or buy their own with a mortgage, and fewer private renters have to compete over each available home.
Competition for rented homes is particularly acute in London, which is why Boris Johnson has to get a grip on London’s housing shortage. The Mayor’s current plans do not come close to London’s objectively assessed housing need, for market or affordable homes. Unless we build at least as many homes as London needs – and especially more genuinely affordable homes – we cannot expect the cost of housing to become less prohibitive.
What can we do in the meantime?
But even with concerted action, building the homes we need will take time. So private renting needs to become more stable for the 9 million people who rent, and quickly. To achieve this Shelter has proposed the Stable Rental Contract: a five year fixed-term contract, during which renters could not be evicted without very good reason, and their rents could not rise by more than inflation. Not only would this give renters the stability they need to put down roots and raise a family, it would also have a calming effect on rents by reducing churn and increasing renters’ bargaining power. Similar measures have worked well in other countries.
It is often the instability of renting that is so damaging. Each tenancy ending means a huge deposit, more agency fees, unpredictable rent increases and moving costs. The Stable Rental Contract is not rent capping – but it would help to reduce the upward pressure on rents.
At Shelter we are desperate to make renting better and more affordable- no policy is ever off the table. The trouble is, no-one has yet produced any strong evidence that suggests rent caps would really benefit renters. However, with the sector growing so rapidly in some parts of the country, the issues associated with private renting have become increasingly location-specific. In this context there is an argument for London’s Mayor, and local councils in pressurised renting hotspots, to be given greater power to intervene to fix private renting.
In the late twentieth century, Britain moved from having the most, heavy-handed regulation of private renting in the world to having the most deregulated, uncontrolled system anywhere. We are now seeing the impact of the almost complete lack of consumer protection for renters. Rather than swinging the pendulum back from one extreme to the other, we should be trying to find sustainable, modern methods of preventing rents spiralling out of families’ reach.